TUNLEES WATCH MFG. (HK) CO. LTD. v. CHANG HOK MAN STEPHEN t/a MASTER INTERNATIONAL CO.

HCA 13300/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13300 OF 1997

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J U D G M E N T

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1. This dispute arises out of an exclusive distributorship agreement (the agreement) executed between the plaintiff Tunlees Watch MFG. (H.K.) Co. Limited (Tunlees) and the defendant Chang Hok Man Stephen trading as Master International Company (Master) on 22 March 1997.

2. Under the agreement, Master appointed Tunlees as its exclusive distributor for the Master Image Gravers I, II and III (Graver I, II and III) and other optional accessories in United Arab Emirates (U.A.E.) for a term of two years from 22 March 1997 to 21 March 1999.

3. Clause 16 of the agreement provides that "Tunlees shall with effect from the agreement purchase one set of Graver I or III (without monitor) and will pay Master $130,000.00 as deposit and that the balance of $10,000.00 for a Graver I or $44,000.00 for a Graver III shall be paid on or before 30 June 1997 or whenever the stock of Graver III is available."

4. Clause 3 further provides, inter alias, that Tunlees shall purchase another three sets of Master Image Graver on or before 21 September 1997.

5. Pursuant to Clause 16, Tunlees did pay the deposit of $130,000.00 to Master on or about 23 March 1997. Apparently the deposit was initially paid for the purchase of a Master Image Graver I. But in June 1997 Tunlees returned the Graver I and asked for the exchange of a Graver III which was never delivered.

6. It is Tunlees' case that Master had expressly represented and warranted that the Graver III would be introduced and available for sale in United Arab Emirates around the end of June 1997, but up to the end of October 1997 Master had failed and/or refused to deliver any Graver III to Tunlees.

7. In the meantime, Tunlees had procured purchase orders for 9 sets of Graver III which sales orders could not be fulfilled because of Master's failure to supply them.

8. It is also Tunlees' case that Master approached Emirate Jewellery Department Store (EJDS) in U.A.E. directly by sending a quotation dated 14 October 1997 and such conduct was in breach of clause 9 of the agreement which obliged Master to refer all enquiries from U.A.E. to Tunlees. Tunlees claims that Master had repudiated the agreement.

9. Tunlees therefore claims against Master for the return of the $130,000.00 deposit as well as loss of profit and damages in excess of $600,000.00.

10. To justify the direct approach to EJDS, Master contends that Tunlees had, in breach of the agreement, failed to devote its best efforts to provide and maintain competent and aggressive solicitation for the sale of the products. In particular, it is suggested that Tunlees had never sent any marketing activity report to Master and in September 1997 had informed Master that it was no longer interested in carrying out the terms of the agreement.

11. Master further suggests that Tunlees was informed of the correspondence and quotation with EJDS so that Tunlees could follow up with the orders. But Tunlees had failed to contact EJDS to handle its orders.

12. Master denies any representation and/or warranty that the Graver III would be available around the end of June 1997. In fact the Graver III was available in late September 1997 and Tunlees was so informed. However Tunlees failed to respond.

13. Master contends that it was Tunlees that was in repudiation of the agreement and Master had by a letter dated 17 November 1997 accepted such repudiation

14. As Tunlees had failed to pay for the balance of the purchase price for the one set of Graver I which had been returned and kept by Master on behalf of Tunlees, Master claims for the balance of $10,000.00.

15. It is Master's case that as Tunlees had failed to purchase 9 further sets of Graver III in accordance with clause 3 the agreement, it is liable to Master for the loss of profit of $22,000.00 for each set making a total loss of $208,000.00.

16. Master further suggests that the failure on the part of Tunlees to follow up the orders from EJDS resulted in the loss of the order for 3 sets of Graver III, namely a loss of profit of $183,000.00.

17. Master counterclaims against Tunees the amounts of $10,000.00, $208,000.00 and $183,000.00 making a total counterclaim of about $400,000.00.

18. The parties raised substantial dispute on the issue of whether the agreement obliged Master to ensure that Graver III would be available before 30 June 1997. Ms Mak of Tunlees was adamant that Mr Richard Cheung of Master did expressly make such promise. Mr Richard Cheung denied such allegation and suggested that he only indicated that Graver III might be available around the end of June 1997. He said he could not be sure of the exact delivery date as Graver III was still being developed at the time the agreement was executed.

19. While I am reasonable certain that Ms Mak must be under the impression that Graver III would be available around the end of June 1997 or else she would not have entered into agreements with sub-buyers with delivery dates as early as August 1997, I cannot say there was in fact an agreement between the parties to such effect.

20. Under the Appendix to the agreement, it was stated that Graver III is to be introduced around end of June 1997 and clause 16 of the agreement stipulates that Tunlees could exchange the Graver I for a Graver III "on or before 30 June 1997 or whenever the stock of Master Image Graver III is available".

21. If the parties' agreement was that Graver III would definitely be available before 30 June 1997, the parties would have set it out in the agreement in more definite terms.

22. Mr Richard Cheung must have indicated to Ms Mak that Graver III might be available around the end of June 1997, but I am not persuaded that such indication constituted a term of the agreement or that the failure to make Graver III available before 30 June 1997 constituted breach of the agreement.

23. Under the agreement, Tunlees was entitled to purchase Graver III instead of Graver I and Tunlees was obliged under clause 3(a) to purchase at least 3 sets on or before 21 September 1997. Master agreed that Tunlees could not make any purchase before Graver III was available. In the circumstance, there must be an implied term of the agreement that Master should make available Graver III before 21 September 1997 or else Tunlees would not be able to fulfill the agreement.

24. Master conceded that Graver III was not available until November 1997 and prior to that Tunlees was never informed of such availability.

25. On the undisputed facts of the case Master was in breach of the agreement.

26. One of the customers of Tunlees in U.A.E. was EJDS. Indeed by an agreement dated 12 June 1997, EJDS agreed to purchase 6 sets of Graver III from Tunlees with delivery dates commencing before the end of August 1997. As Master could not make any delivery to Tunlees in time, the agreement with EJDS had to be cancelled.

27. In early October 1997, EJDS approached Master directly indicating interest in the Master Image Graver machines. Instead of complying with clause 9 of the agreement and referred such enquiries to Tunlees, Master chose to deal with EJDS directly.

28. By a fax message dated 14 October 1997, Master supplied a quotation of the Master Image Graver machines to EJDS. Master also indicated that the message would be followed by a telephone call. It was expressly stated in the fax message that the price quoted was FOB Hong Kong and was valid for one month. There were also stipulations as to payment, installation and delivery.

29. In response to the fax message from Master, EJDS on the same date sent a fax to Master showing interest in buying 3 sets of Graver III and other accessories. The fax started off as follows: -

"Thank you for your above referred fax with the quotation for Master Imager Graver. After we discussed with our Director Mr Abdullah Mohammad of your offer, we decided to buy the qty. as follows...."

30. It was not readily known as to the nature of the alleged offer made by Master to EJDS, as Master did not give any evidence on the matter. But clearly it must be an offer relating to the supplying of Graver III to EJDS.

31. In the same fax, EJDS also stated: -

"As we are ordering for 3 sets of units, we could pay you HK$150,000.00 per unit and expect 10% discount on consumable parts."

32. On the same date, i.e. 14 October 1997, EJDS further sent a fax to Master indicating that they were waiting for the final confirmation and Proforma Invoice for their order.

33. Master by a fax message dated 16 October 1997, response to EJDS in the following terms: -

"Thank you for your confirmation (dated 14/10/97) of purchasing 3 sets the captioned engraving machine, as we are now preparing the document you required, we will fax the copy to you as soon as possible......"

34. Master subsequently tried to savage the situation by sending a letter through its solicitors to Tunlees. In the letter, it was suggested that Master was referring the "enquiries" from EJDS to Tunlees in purported compliance with clause 9 of the agreement. Master also for the first time complained be it mildly that Tunlees had failed to provide competent and aggressive solicitation for the sale of Master Image Graver and to handle orders promptly.

35. The aforesaid letter and the subsequently letters from Master's solicitors, however they were dressed up as, were just desperate attempts to try to cover up what was obvious. Master had indeed failed to comply with clause 9 of the agreement. Not only did it not refer the enquiries from EJDS to Tunlees, it had in fact concluded deals with EJDS on the supply of Image Graver machines to EJDS behind the back of Tunlees.

36. Master had clearly agreed to supply Graver III to EJDS at the price of HK$150,000.00 per set and other accessories at a price much lower than those offered to Tunlees in accordance with the agreement.

37. Such conduct, not only was a clear breach of clause 9 of the agreement, also struck at the very root of the agreement.

38. The prices offered by Master to EJDS were substantially lowered than those offered to Tunlees under the agreement and in the circumstances it was no longer feasible for Tunlees to conclude any deal with EJDS.

39. It would not be possible for Tunlees to continue with the agreement, which was an exclusive distributorship agreement.

40. On the undisputed evidence, Master was clearly in breach of the agreement and Tunlees was entitled to terminate the agreement and claim for damages.

41. While Master must repay the deposit of $130,000.00 and be responsible for the air ticket expenses of $6,820.00 incurred by Tunlees in furtherance of the agreement, I am concern about the loss of profits allegedly suffered by Tunlees as a result of the repudiation of the agreement by Master.

42. The claimed loss of profit was based on the difference in the prices offered by Master to Tunlees i.e. HK176,000.00 per set and the price agreed between Tunlees and its sub-purchasers i.e. US$ 29,600.00 or HK$230,880.00 per set.

43. In the agreement the price offered by Master was HK$176,000.00 per unit (approx.) with cash on delivery as payment terms. Tunlees also agreed to cover all the expenses including round trip air ticket, food and hotel accommodation, and labour cost of US$200.00 per day for any technicians requested by Tunlees in U.A.E. in connection with the technical assistance and repair service. There was no explanation as to why the price was stated as an approximate figure and how the actual price was to be determined. There was also no evidence of the likely costs of the technical assistance and repair service.

44. Under the agreements between Tunlees and its sub-buyers, the price included free installation anywhere in U.A.E. and free training anywhere in U.A.E. Tunlees also agreed that the price was inclusive of shipment costs.

45. There is also no evidence if there was any alternative supply of Graver III and if so what would be the market price.

46. On the aforesaid evidence, it was not possible to decide if Tunlees would suffered as loss of profits and if so, the extent of such loss. The alleged loss of profits had not been proved.

47. In the circumstances, Tunlees is only entitled to the return of the deposit of HK$130,000.00 and the costs of the air-ticket of HK$6,820.00.

48. Tunlees succeeds on its alternative claim of HK$136,820.00.

49. There will be judgment for Tunlees against Master in the sum of HK$136,820.00 and interest thereon at the rate of 10% p.a. from the date of the writ, namely 8 December 1997.

50. Master also has to pay Tunlees the costs of the proceeding to be taxed if not agreed with the following riders:-

i. No order as to costs on Tunlees' application to amend the Statement of Claim;

ii. No order as to costs on Master's application to re-amend the defence and counterclaim;

iii. No order as to costs for the morning on 14 May 2001.

51. The order on costs in an order nisi and will be made absolute 14 days after the handing down of this judgment.

52. Master's counterclaim is also dismissed with costs.